State agency predicts recession for 2009

The state statistics agency says France will enter recession in 2009 for the first time in 16 years and faces a sharp rise in unemployment. Finance Minister Christine Lagarde (pictured), however, is predicting modest growth of between 0.2 and 0.5%.

AFP - France will fall into recession next year for the first time since 1993 and faces a steep rise in unemployment, the state statistics agency said Friday in its official economic forecast.

The government stuck with its forecast of a slender expansion in 2009 of 0.2 to 0.5 percent, however.

While hard hit by the global economic crisis, France has so far not been in recession as defined as two quarters of negative growth.

But the INSEE agency's verdict was bleak. The French economy grew by only 0.1 percent in the third quarter of this year, shrank by 0.8 percent in this quarter and will contract again by 0.4 percent in the first quarter of 2009.

The agency hopes for a slow recovery after that, but gross domestic product could still decline by 0.1 percent in the second quarter -- marking a nine month long contraction -- and 2009 as a whole could still see negative growth.

"The business climate has considerably deteriorated in France in the last year and a half, coming close to the levels seen in the 1993 recession," the report, released in Paris, said.

"Tighter lending and an all round rise in risk aversion are pushing firms to cut down on investment and expenditure and to scale back their inventories sharply," the report, entitled "Recessions", warned.

The agency predicted that the unemployment rate will rise to eight percent by the middle of next year, up from 7.3 in September this year.

"The financial situation in the coming months is the main source of uncertainty. Lingering doubts as to the value of banks' assets mean that a further worsening of the financial crisis cannot be ruled out," it warned.

Several French banks have been weakened by the global credit crunch and some have found themselves swept up in the panic surrounding the Madoff fraud and the full extent of their losses are still unclear.

INSEE's report is bad news for President Nicolas Sarkozy, who came to power last year vowing to boost French voters' spending power and now faces years of economic slowdown and rising welfare bills.

Experts had already predicted falling growth last year but Sarkozy's finance minister, Christine Lagarde, has promised growth of more than 0.2 percent over 2009, once the effects of an economic stimulus package come through.

"I'm sticking with a range of 0.2 to 0.5 percent (growth in 2009), as while there will be a considerable deterioration in the business climate, there will also be a French recovery programme which is estimated will add 1.0 percent to GDP growth, and the effect on France of recovery programmes of other EU countries that could add 0.5 percent," she told AFP after a meeting of EU finance ministers in Paris late on Thursday.

Obtaining growth in 2009 seems over optimistic to INSEE economists.

"In order for France to have merely zero growth next year, it will have to have the equivalent of a 1.4 percent expansion in the last two quarters of the year," explained the INSEE report's author Eric Dubois.

Sarkozy hopes to shore up the eurozone's second largest economy by guaranteeing bank deposits, buying government stakes in key industries and setting up a 26-billion-euro (33-billion-dollar) stimulus package.

Nevertheless, French industry is in crisis, with the building trade and the key car-making sector -- which alone accounts for 10 percent of the workforce -- particularly hard hit.

INSEE predicts French exports will drop by three percent by the middle of next year, and manufacturers' woes are set to continue as the firms dump excess stock on a shrinking domestic market.

Industrial production will fall by four percent in the last quarter of 2008 and by a further 1.6 percent in the first quarter of next, with a similar decline in the construction sector.